Combining Parabolic SAR with ADX

Entropy Combining Parabolic SAR with ADX

The Parabolic SAR is flexible and can be merged with many indicators. The key principle to remember is that the SAR’s main job is to pinpoint the trend direction and any changes in that direction. It’s a good idea to pair it with indicators that measure the strength of a trend, not the direction, as that’s what the SAR is for.

Combine the parabolic SAR with an indicator that determines the strength of a trend, not the direction of the trend, as that is the role of the SAR itself. One of the most common indicators used to identify the strength of a trend is the Average Directional Index (ADX).

Pair the Parabolic SAR with an indicator that measures how strong a trend is, not which way the trend is going, since that’s what the SAR is for. A commonly used indicator to figure out the strength of a trend is the Average Directional Index (ADX).

Integrating with the ADX

A frequently used indicator to gauge the strength of a trend is the ADX (Average Directional Index) indicator. This indicator examines the price movements and gives a reading to show if the current trend is strong or weak. A strong trend reading suggests a continued move is likely, while a weak reading often means the market will likely stay within a range.

How to integrate the SAR and ADX?

If the ADX shows a reading between 0 and 25, the trend is seen as too weak for trading and the market is likely to be stable. If the ADX has a reading above 25, then the trend is considered strong enough for trading.

Be cautious with a high ADX reading. If the ADX reading hits 50 or above, there’s a strong chance that the asset might pause and change direction, so be careful when the ADX shows a very strong reading.

Reading the ADX and SAR Together

The image below displays the ADX reading under 25, indicating a weak trend and a higher risk when using the SAR to enter trades.

ADX Below 25
Price is stable; SAR isn’t giving accurate trend signals.

It’s evident that the market is stable and the SAR isn’t offering helpful insights.

However, in the following image, the ADX value exceeds 25, creating favorable market conditions to make trading decisions with the SAR. It’s clear that the market is on a trend, and thus, the SAR can assist in entering a trade as well as setting a trailing stop loss.

ADX Above 25
Price is on a trend; SAR is giving accurate trend signals.

Adjusting the Parabolic SAR Settings

When using the parabolic SAR, settings can be changed to match personal preference.

Setting the SAR farther from price action results in slower reactions and fewer signals, but they are likely to be more reliable. Bringing the SAR closer to the price action leads to quicker reactions and more signals, although they might be less reliable.

Testing the SAR Settings

Once you’ve chosen the settings you want to test, you’re all set to start gathering data for comparing the outcomes of each setting.

A good starting point is to trade with the SAR on its default settings.
Your trading journal is an excellent resource for this kind of analysis.

After collecting enough data from trading with the default settings, you can repeat the process with various settings, analyzing the outcomes of a series of trades each time and comparing them with the original set.

It’s worth mentioning that including more trades in each sample over an extended period will make the analysis results more reliable and beneficial.

Examine and test various SAR settings and strategies using your trading journal. The more trades you execute during your sample period, the more trustworthy the results will be.

Summary

So far, You have learned –

The Parabolic SAR (SAR) is a versatile tool that can be paired with many indicators to identify the direction and changes in a trend.
It’s beneficial to pair the SAR with indicators that measure the strength of a trend rather than the direction, with the Average Directional Index (ADX) being a common choice for this purpose.
The ADX indicator provides a reading based on price movements to indicate whether a trend is strong or weak, assisting traders in making informed decisions.
Readings from the ADX can be integrated with the SAR to evaluate market conditions: a reading between 0 and 25 indicates a weak trend not ideal for trading, while a reading above 25 suggests a stronger trend conducive for trading.
Adjusting the settings of the SAR can tailor its responsiveness to price actions, thereby affecting the reliability and frequency of the signals generated.
Testing and analyzing various SAR settings through a trading journal over an extended period with more trades can lead to more reliable and insightful results, aiding in the refinement of trading strategies.

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